Rush Enterprises, Inc.

Good day and thank you for standing by. Welcome to the Rush Enterprises Q2 earnings release conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the call, you will need to press star 1-1 on your telephone. You will then hear an automated message advising... Your hand to raise. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Rusty Rush, CEO. Please go ahead.

Yes, President Controla.

and Michael Goldstone, Senior VP, General Counsel, and Corporate Secretary.

Steve, for a few comments. Certain statements we will make today are considered forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Because these statements include risk and uncertainties, our actual results may differ materially from those expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include but are not limited to those discussed in our annual report on Form 10-K for the year into December 31st, 2024, and in our other filings with the Securities and Exchange Commission.

As indicated in our news release, we achieved second quarter revenues of $1.9 billion and net income of $72.4 million, or $0.90 per diluted share. I am pleased to announce that the Board of Directors approved a $0.19 per share cash dividend, a 1% increase over our prior quarterly dividend, and our ninth increase since announcing our intent to begin paying a quarterly cash dividend in July 2018. Market conditions remain difficult the second quarter as the industry continues to face a freight recession that has persisted for more than two years and continues to face uncertainty with respect to trade policies and engine emissions regulations. As a result of these factors, many of our customers are delaying vehicle acquisition and maintenance decisions. However, despite these many challenges, our employees remain focused on the operational discipline and customer service in the quarter, which helped us deliver solid results. So I want to thank them for their hard work and dedication. Our aftermarket operations accounted for approximately 63% of our total gross profit in the second quarter, with parts, service, and collision center revenues reaching $636.3 million, an increase of 1.4%, compared to the second quarter of 2020, and our absorption ratio was 135.5%. In the second quarter, aftermarket revenues reached their highest level in the past 12 months, and we saw sequential growth from owner-operators and small fleets, which we hope and believe may be early indicators of improving demand. Technician turnover reached a 12-month low, and we expanded our aftermarket sales force, further strengthening our ability to support our customers. Looking ahead, we expect stable aftermarket demand in the third quarter, with potential for modest sequential growth. With respect to truck sales, we sold 3,178 new Class A trucks in the U.S. during the second quarter, accounting for 5.4% of the total U.S. market. While this represents a 20% year-over-year decrease, it is important to note that it is primarily due to the timing of several large fleet deliveries that occurred in the second quarter of last year. which made for a difficult year-over-year comparison. In Canada, Class A sales totaled 81 units, representing 1.2% of the market. Although demand from large over-the-road fleets remains weak, we achieved strong sales in the Class A vocational market, highlighting the strength of our diversified customer base. We expect vocational demand to remain solid for the remainder of the year. However, due to ongoing uncertainty around trade policy and engine emissions regulations, New Class 8 truck sales may decline sequentially in the third quarter, and the market outlook beyond the third quarter is difficult to project at this point. In the medium-duty market, we delivered 3,626 new Class 4-7 commercial vehicles in the U.S. in the second quarter, representing a 1% year-over-year increase and 6.2% market share. We sold 177 medium-duty vehicles in Canada, which represents 4.6% of the Canadian Class 5-7 market. Our medium duty results were solid in the second quarter, with both year-over-year and quarter-over-quarter sales growths. Demand was broad-braced across all of our customer segments, and we saw particular strength with lease and rental customers. We believe that our ready-to-row inventory program continues to differentiate us, enabling faster delivery and improved flexibility for customers. Looking ahead, we expect Class IV through VII truck sales in the third quarter to be consistent with our second quarter. We sold 1,750 used commercial vehicles in the second quarter, essentially flat compared to the same period in 2024. While financing remained a challenge for used truck buyers, we believe our inventory is right-sized and our used truck strategy is on track. Unlike the new truck market, the used truck market is less exposed to trade and regulatory uncertainty. which could give truck buyers more confidence and incentive to consider used trucks as part of their fleet mix in the near term. We expect third quarter used truck sales to be in line with the second quarter. Rush Truck Leasing achieved record revenues of $93.1 million in the second quarter, up 6.3% year-over-year. Our full-service leasing revenue increased as we brought new units into service, which also helped lower operating costs and increase profitability. rental utilizations will lower year over year, but improve sequentially, and we are confident our leasing and rental performance will be solid for the remainder of the year. On the capital allocation front, we remain focused on returning value to shareholders. During the second quarter, we repurchased $83.9 million of our common stock as part of our expanded $200 million repurchase authorization. We also paid a cash dividend of $14.5 million in the quarter. And as I previously mentioned, We just increased our quarterly dividend by 5.6%. In summary, I am proud of our team's performance in the second quarter. Through disciplined execution, we continue to deliver solid financial results and return value to shareholders. As we move forward, we will continue to remain focused on operational efficiency and providing our customers with best-in-class service.

With that, I'll take your questions.

Thank you.

At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Daniel Embro with Stevens Inc. Your line is now open.

Yeah, hey, good morning, guys. Thanks for taking our questions.

You bet, Daniel. Good morning to you, sir.

Morning. Well, Rusty, I'll start maybe on the industry a little bit. I'm sure visibility into orders is about as clear as mud, but how are you thinking about the third quarter as we sit today? And then from a strategic standpoint, just related to that, with the lack of visibility, what are the OEMs communicating? Are they taking down production? Are they still pumping out new trucks and telling you guys to deal with them? What's the order backdrop, and how is that changing with the OEMs?

Well, good question, sir. Dramatically different in the back half of the year from the first half of the year. Every OEM... is taking production down. Every OEM has shutdown days. I'm not going to get into specifics, but you can broadly say across all brands, all manufacturers, you're going to see a lot less trucks built. You say, so what causes all that? Well, as I talked about, it's the uncertainty. I'll get to the emissions stuff, and if anybody wants to know my opinions on all that, and where we stand from a 232 and a tariff perspective there, but Let's just look at April, May, and June. April, May, and June were the worst three months of order intake since 2009. The U.S., Canada, and Mexico took in less than 30,000 Class 8 trucks. That eventually comes to fruition inside of the build that we see. There's just still so much uncertainty there. to, to know where, what, what, you know, we had, we, you know, we built a lot of trucks, actually Q2 retail deliveries were flat, was slightly up, uh, for the whole country. But I think that everyone pulled everything forward that they could. And right now, uh, production is going to take is dramatically hit from core sequentially is we've seen since COVID. Okay. And I put COVID as an outlier. Really, since you go back way further than that to see, you're going to see from a production, not necessarily all the way through retail. Retail will be down too, but production will be drastically down across all OEMs currently because there's just not any demand out there because uncertainty is there. I mean, I don't look, you know, I guess, what was it, Tuesday? We pulled the GHG3 stuff, but that's still... is not giving any clarity as to what we're going to get from an emissions perspective. Is it going to stay 200? Is it going to be 0.035? Is it going to go to somewhere in the middle? These four engine manufacturers and OEMs don't even have direction yet from the government. So what we're dealing with creates uncertainty onto the chain to the end user, on top of the fact that we're still in a freight recession, etc., So, you know, buddy, as I said in the release, you know, for sure I'm expecting to be down in third quarter. Don't even ask me what the fourth quarter is going to look like because, you know, it's hand to mouth. And with less trucks for sure going to be built, with people canceling shifts, folks laying off employees, folks taking shutdown days, large numbers of these, taking two, three weeks off. Every manufacturer has their own philosophy, but no one is right now. Currently, as we sit, everybody's handling it the same, to be honest with you, but differently, but different, but the same, because there really is not any demand because there's still no firm, you know, firm knowledge of where we're going to be from an EPA perspective. And January of 27, is it going to stay at 0.035? Is it going to stay at 200? You know, stay at 200, go to 0.035, which is what the rule of the law says it is right now. But that is very much in question right at the moment. Buddy, I have no exact idea. And so customers, by nature, are just waiting to get some direction. Now, I think I said somewhere in the release that, well, maybe things will start shaking out and looking a little better. And what I'm talking about is activity. I'm not saying orders. I'm saying by the time we get to Q4, I hope in the latter part of the year that we can finally get some solid trade stuff down from a tariff perspective. You know, as the Congress and the administration is looking at the 232 rule, if that gets where we stand on that, if we get where we stand from an emission perspective, then you know how to play your game, right? You know what to do with your business. I mean, if it goes and stays at 0.35, we're probably going to see, well, probably we will see a pickup next year, I think, in order of demand. If it stays at 200... Not sure what that means, right? You won't have the additional cost. You won't have, you know, the change in technology to deal with. So, you know, fleets won't be looking. I mean, I hate to use the word. I hadn't heard anybody use the word in a while, pre-buy, but I hate to even say it. There might be a slight pre-buy if we go to 0.3, stay at 0.35 next year. I mean, and I know I'm answering. I'm trying to give you a broader answer. You know me. I can't help myself. maybe your question, but trying to give you some outlook beyond where we are right now in Q3 and Q4, but, you know, into next year, because I think that's what's important to understand is to try to get an outlook into where it's really going to go. But I can't tell you because I don't have the answers to these questions right now, right? And so all it does is create uncertainty. And we're finally seeing, you know, the fulfillment, true fulfillment of the uncertainty we talked about in the last call back in April. but it only continues to intensify because the further down, you still don't know, right? It just continues to breed, you know, this, well, what do I do? What should I do? Are engines going to go up X? You know, we need some clarification. I think once we get that, I think we should maybe be able to, regardless of how much activity, I'm not going to get into it, It'll depend on what some of these rulings are, also some of these trade policy decisions. But I think we'll be able to get kicked off, really. I think we're almost in a lull until we get these answers, to be honest with you. And besides, remember, I would tell you from what I've been reading in the last couple weeks, most of your public carriers... I would say the reports are slightly better than they were in Q1. They're not outstanding by any such, you know, but I think more people have gotten to their numbers as depressed as they are. Um, then what, you know, you can see slight green shoots in there, but not a lot. There's still, it's still a tough road out there. Uh, cause we're still out of balance. Right. And I know I'm throwing out all these things, but we're still, we still, we still got too much capacity.

know i think it's continuing continuing to slight come out slowly out of the marketplace and to meet the demand level that's out there but you know there you go i'll shut up no always helpful and uh appreciate the the answer there i guess maybe on what is more in your control right now i guess the parts and service improvement in 2q was notable i think revenue was up it sounds like technician and retention got better i guess one Can you talk about what you guys changed to actually drive that or improve retention and hiring? And then two, if you were to size up maybe what the earnings power or revenue uplift you can get from the hiring you've done, like how should we think about the earnings power that you could add that's more in your control from growing parks and service over the next year relative to everything else out of your control, like the class A demand?

Well, I think right now, By maintaining flat but slightly up, I think we're growing compared to the market. I think we're doing better than the aftermarket from the reports. And remember, getting aftermarket comps is probably the most difficult thing there is because you get them from different sources. It's not like vehicles. Vehicles are real simple in their title. It's easy to count those. Getting to understand what the overall aftermarket is. But I think we're doing slightly better than the overall aftermarket comps. I would tell you that I think our historical, traditional way we go to market is what's allowing us to be fairly good. I would tell you that we're working really hard. We just finished the strategic offside here in June to really try to refocus, but even more double up. with some more, you know, strategic initiatives to try to really accelerate the growth in our aftermarket business, especially going into next year. Right now, if we can maintain, which I will tell you, you know, since I'm on the box, I guess I can say what I want now that I've released earnings. You know, July continued and maybe a little better than June. Not great. Let's just call it flat. We're continuing to maintain, which, you know, from a company perspective, given the I almost feel like we're growing, okay? I mean, it may have said 1.4 at the revenue with a little expanded margin. Well, to me, it was better than that just given the environment, right? So to quantify it exactly what those – because they were slight. We grew our sales force slightly. I'm not going to sit here and kid you. We didn't add double digits or anything like that because I'm not sure the market's accepting of that right now. But I'll tell you what, we're positioned to do things like that. And we've got a few other things, but again, some of this stuff's proprietary from my perspective, so I'm not going to get into everything. But trust me, we're hands down committed to continue to do what we have traditionally done, plus throw a few new things at it as we move forward, especially into 26 and 27. You know, like I said, I believe we can maintain where we're at in parts and service based on what I'm seeing. We haven't seen anything go way out of whack or out of line. And as you know, as I was saying, anywhere 63% last quarter of our profits come from parts and service. So that being the much more stable. That's why sometimes I think our business model is underappreciated in the fact whether it's truck sales, it's new, it's heavy, it's used, it's medium. You know, our leasing operations and what they contribute to the company. Obviously, our parts and service operations and the stability. And then our ability to manage expenses where, you know, if you look at the earnings this quarter, it's the first quarter of the last three or four, that we weren't down 4% or 5% in G&A. We were slightly up, but basically flat. But you have to go back and understand that we made those cuts over a year ago. But being able to maintain that, I'm very proud of people. In spite of inflationary pressures and things like that, we've been able to maintain that piece of it. So as usual, like I said, I'm rambling off on other pensions. But at the same time, I'm trying to give you a flavor. I was really proud of the court. When you look The truck sales pressures that we had and compare them and to year over year be less than 10% off of what we were last year with 25% less trucks or so. I was class H saying. I was really proud of that. And it was driven by the parts and service operations, right? And I do believe we have growth back to the original question in there. I'm not sure that it takes place dramatically this year, but I am very comfortable. Like I said, what makes me feel good is even though we're only slightly up, I feel like it's more than that, given the environment that we're dealing with, man.

No, always helpful. Appreciate all the color. I'll leave it there. Best of luck, guys.

Thank you, Daniel. Any other questions, I'll be happy to take.

Thank you. Again, as a reminder, to ask a question, you will need to press star 1-1 on your telephone. Our next question comes from Andrew Obin of Bank of America. Your line is now open.

Good morning, gentlemen. Good morning, Mr. Obin. Just a follow-up on the parts and service question. It seems that you know, a lot of the production shutdowns have to do with the fact that, you know, it's more regulatory uncertainty more than anything else. You know, meanwhile, your parts and service business would indicate that people will continue to utilize the trucks in the field. You know, wouldn't this setup result in more wear and tear and all the trucks, you know, just lack of natural replacement? Wouldn't it drive an uptick in parts and service over the next six to 12 months?

You're right on, Andrew. That's what we're hoping for, okay? Theoretically, you're correct. But there's one caveat. What's your business like, okay? Theoretically, you're 100% correct, but you'll have to take into account, you know, what does a customer's business truly look like, right? Are they squeezing it down because their business isn't that good? So where, for sure, you're going to drive older age trucks, But first, you've got to make sure you're utilizing all of them, too. What's your utilization? And how is your business? And if all those align, then there's no question what you're saying is totally correct. But those are caveats to that that you have to take into account also. So, yes, without question, I mentioned it. But, yeah, in the back of my mind, that's what I'm hoping for. But I've got these caveats that ride with it, right?

I totally get it.

Their business has to be decent.

Another question for you, and I appreciate sort of the fact that you've accelerated buyback. But if you look at your track record, if you look where we are in the cycle, can you share with us the latest thoughts of the board on maybe stepping up the buyback? Because historically you've been very conservative with your balance sheet, and I appreciate the reasons for it. But, you know, the pushback we get is, you know, the execution is fantastic. Stocks are inexpensive. They have capacity on the balance sheet. You know, how is the boards and your thinking is evolving on the share buyback?

Well, I think we announced during the quarter that we added $50 million to it. Okay. I think I've got about $75 million or so left to spend of the $200 million. I would hope that the opportunities present themselves. We wouldn't be approving it if we didn't plan on trying to spend it. But, you know, we do it prudently. You know, I'm just not out there, and we do it under a 10B5. So, right, so, you know, what happens sometimes is you set prices, and, you know, you don't touch it for a while because we're in a quiet period. Now, Steve and I will be re-looking at that tomorrow as we reset the matrices up to continue making sure we're purchasing, right? uh the stock fluctuated some in the quarter you know we got down a little bit and back up and you know we set a matrix from june the 10th and we'll be don't touch it till now and we'll be looking at it but we wouldn't approve the the money that we've got out there if we didn't want to spend it uh so you know we feel real good to get our cash position heck we'll pick up i don't know 35 40 million with a big beautiful bill in cash from a tax perspective this year. As you know, our balance sheet is nice and flush. We have the capability to do it. But as you said, we have been over time. We've been typically fairly conservative. I'm not going to go out and But I think we have proven the ability and the want to and the desire to buy stock back. Maybe not at the pace that some people want. Maybe at the pace that some do. Maybe too much for others. But it's at the pace that we feel comfortable with. We believe in this organization. We think it's a great opportunity to buy stock back at every moment.

I mean, look, I'll just let the track record go. 20-year history says there's never one – bad moment to lever up and buy back for our stock.

All right. You used the word you're not going to ever get me to do, lever up. Let's step back here a minute, Andrew. I know. I get it. I get it. Lever up. It's not rusty. I'm sorry. I'm too conservative. Fire me. I'm too conservative. A little bit more leverage.

A little bit more leverage. A little bit more leverage. How about a little bit more leverage? Let me ask, look... As I said, the execution has been stellar. We appreciate it. Thank you. Can you just talk about just what are you seeing on MACRA? I keep asking this question. You have fantastic systems. Just maybe walk us across key verticals, across key geographies, and more importantly, how has your thinking evolved over the past, let's call it three, four months since we've been liberated? Thanks so much.

Oh, gosh. I always look back to the 1st of April every day, Andrew, and think of what a liberation it's been. Okay. The more uncertainty you shake a stick at. How have I changed in three to four months? Well, I know this. You asked about geographies. I don't want things. I don't want to be like the whole country like California has been the last year and a half. Let's just say that, okay? No disrespect to my lovely California stores, anyone out there. But from a business perspective, industry-specific perspective, it has been very, very difficult on the truck sale side. No one – it's almost like gridlock. I mean – If the whole country was to act like California has been from a truck sales perspective, we'd be woo. It'd be really tough. But fortunately, obviously, we're doing different things here than the rest of the country. As the political sides fight it out with the feds, having obviously a difference of opinion than CARB does out there. But I'm staying out of that. But fortunately, you know, that's loosening up and going to a little, you know, a more what I would call realistic look. I, when you ask what's changed, that's a lot that's changed. No matter where the EPA ends up, it is way different than what it was November 5th or whatever it was of last year, okay? And it's moved to what I would say, I'm not going to get It's moved too far or whatever, but it's moved in the right direction to a more realistic view of what the involvement should be from the EPA's perspective that makes sense for this country. I'm not going to get into how far each way, but I'm going to say that's obviously changed a lot over the last few months. The problem is it hasn't settled down. Once that gets settled down, I think we'll all be able to play the game. Right. It's like, tell me the rules and then I'll play the game. I don't care if they're good or bad or whatever, whatever the tariff is. Stop changing all this stuff. If I'm a manufacturer, I know manufacturers have to hire 20 people just to try to figure this stuff out on a daily basis. Right. As to where they're at. We need a little stability with a little looking forward. And I think that'll be good for everyone. I really do believe. that we're going to get some of that later this year. So I couldn't have told you in April. I feel like it's coming. I feel like we're closer to gnomes from the EPA and firm trade policies, I hope. So that, you know, whether it's the inflow or outflow of freight for our customer base or for a manufacturer trying to figure out what vehicles cost or what they have to spend and what they have to have their engines, we just need some stability. We need some, this is what it's going to be, but we're in the middle of, but we're getting closer, I think, to getting those answers a whole lot closer than we were in April. Right. And that's why I'm kind of proud of the quarter is just because, Hey, we took a 25% hit in drug sales, but, and we took way more than 7 cents difference in gross profit from trucks from Q2 of last year to Q2 of this year. But Hey, we went from 97 to 90. Why? Because we executed like hell. on everything else that we have in our touch. And so that's why I know this organization will continue to be fluid enough to be able to keep managing. If this has proven anything to me, it's that we do have that ability. I'll put our numbers up against anybody's numbers, but I'm the only public, really, anyway, singular front beater out there of execution in Q2, and we plan on doing it beyond Q2 and into the future. Andrew, I just... It's just I feel closer to knowing the rules. And once customers know the rules, they'll be able to make decisions. But we don't have the rules of the game yet. And I think what you see right now is just gridlock on folks ordering trucks. They want to know what's going to happen.

So that trumps everything, right? So it's hard to get a read. what the macro sentiment acts at because this uncertainty... No question.

That trumps everything right now. What... Are they going to... Am I going to have to go to... Is it going to stay at 0.35? Oh, excuse me. Is it going to stay at 200 milligrams? I mean, there's a very good chance it could stay from... Look, I don't know. I'm not involved. I'm not in Washington, D.C. I don't have a phone number to anybody at the EPA. But I know a lot of people that do. I get a lot... And by the way, those opinions I'm getting are varied. So, you know, I'm just trying to form an opinion when it's, you know, secondhand information. But I am pretty close to a lot of folks. The funny part is that, you know, they're not all the same thought processes, right? And when you hear this, if you put yourself in my shoes, well, I understand why a customer is stuck in gridlock, okay? I get it, you know, besides my business being somewhat tough. I'm going to buy what I have to buy. And I mean, I just really have to buy. I'm not going to step out till I know. And at the same time, you know, I want my business to get over the road carrier, which is still 65% of everything out there or better. You know, I want my business to also be a little better. So, you know, even though we retail was good right now, we've hit that screech point, but I do believe, as I said, Just give us some stuff. And I think activity, now that activity will start. Remember, for me, it's next year business. So, okay, Rusty's not saying this is all fourth quarter great business for us. I'm the tail of the dog. So, but guess what? It's got to start with activities. Then it starts with pricing and quoting and orders and then manufactured and then all of a sudden it has to be dug to a truck sometimes after it comes off the line until it gets to that retail space. But I do believe, not to the volumes of how much will be determined. If it goes to 0.35, stays at 0.3, stays where the law is right now, not the 200 we're at. then you're probably going to get some uptake without question. Now, I don't know about the ability to be able to volume-wise produce because we're getting so late in the game, but I'm confident the administration will come with something, I hope, in the next 60 days. just to give clarity to everybody out there. This is from a truck sales perspective. Thank God two-thirds of my problems come from parts and service, though, as a company. But I do need that other piece too, okay? I want that other piece with it, that truck sale piece at the same time. But again, our leasing business is solid. We expect it to remain solid. Not going to grow exponentially, but I guarantee it's pretty good. And, you know, keep our parts and service dog, maintain discipline inside our expense base. I don't really want to go out there and rip this place apart. We cut it back last year. It was the right thing to do. We've maintained basically exact flat headcount other than adding revenue creation positions. And we're just going to keep hanging in there, producing solid results till we see a catalyst to really drive a market. better than what it's been right now. You know, the truck is in the sales market. And also, like you said, guess what? When you talked earlier, your first question earlier, well, hey, Rusty, if they get older, should you work on them more? True, right? As long as their business is in line with the expenditures needed as they fleet ages, without question, people have to do more parts and service. That benefits us too. It's better margin benefits. But we do want to sell trucks. We need that whole thing working. But the truck sales side is just on a little bit of a hold right now until we get a little more clarity.

Thank you very much, Rusty.

Really appreciate it. You're more than always, sir.

Okay. I'm showing no further questions at this time. I would now like to turn it back to Rusty Rush for closing remarks.

Sure. Nothing big here. We appreciate everybody's participation. We will look forward to speaking to everyone in late October, I do believe. So take care. We'll see you now.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.